Building up to an "excellent" credit rating or a FICO score of 740-plus isn't a feat only rich people can do.
I can prove it. Not too long ago during my college years and for almost two years after graduating, I worked as a bank teller making no more than $15,000 to $24,000 per year. And during that time I was able to build my FICO score from nothing to well into the 700s.
I have more good news. You don't have to take out a variety of expensive loans, carry a soul-sucking balance on your credit card or be forced to co-sign with someone else to achieve the coveted "excellent" credit rating.
So how can you take your credit score from zero to hero without being rich? By keeping the five major categories that make up a FICO score in mind and following a few simple rules:
1. Start Small -- How to Build Credit with a Credit Card
You don't have to fruitlessly apply for a bunch of loans to build credit. In fact, I first began building my credit when I was age 18 by simply applying for one thing -- a student credit card, which was fairly easy to get bank approval for (even without a credit history) since I was employed with a stable income.
Another option to jumpstart your credit building -- especially if you have had credit troubles in the past -- is to apply for a secured credit card. With a secured credit card, you agree to deposit a certain amount onto the card before you start using it, and you can't charge beyond that amount.
Because these cards reduce risk for the card-issuing bank as they can collect your up-front deposit in case you can't repay, secured cards are the easiest to be approved for. After six months or a year of proving your creditworthiness, you can try applying for a traditional credit card in your bid toward excellent credit.
2. Keep Your Credit History Clean
Even with my annual income being below $20,000 a year at the time, I always made sure to pay my credit card bill on time or even before the due date, every time. If you want excellent credit, you should too. This is an especially important rule considering your payment history accounts for a hefty 35% of your FICO score, while the length of your credit history accounts for another 15%.
One more thing here: With a full 50% of your FICO score being tied to your repayment history, it's a good idea to regularly check your credit report to make sure there are no inaccuracies made by lenders or unauthorized transactions on there. You can check your credit report for free once per year through AnnualCreditReport.com.
3. Avoid Credit Card Balances
In addition to paying on time, I always made sure to pay off my credit card's entire statement balance each month so I never had any debt. Sure my card had a $1,000 credit limit at the time so I could have carried a balance, but I knew better.
Why is carrying a balance bad for your credit rating? Beyond setting you up to be charged interest on your debt, carrying a balance raises your credit utilization ratio, which compares how much debt you owe versus your total credit limit.
The higher your credit utilization ratio, the more debt you have versus your total credit limit, and therefore the less able you'll be to repay your loans in the eyes of a lender. That's also bad for your credit rating.
If you want your credit utilization ratio -- which accounts for a whopping 30% of your FICO score -- to be as low as possible, try to keep the total amount of debt you owe down to a minimum. You'll also want to follow...
4. Keep Your Credit Card Accounts Open
To keep my credit utilization ratio as low as possible, I never closed credit cards even if I didn't use the cards anymore. Why? Because the higher your total credit limit and the lower your total debt, the healthier your credit utilization ratio -- and credit rating -- will be.
Let's say I opened three credit cards over the past few years, each with a $1,000 credit limit. Assuming I had no other credit lines or loans, my total credit limit would be $3,000. If I carried $1,000 in debt balances on those cards, I'd have a credit utilization ratio of 33% (or $1,000 in debt/$3,000 in credit limit). But if I closed one of the cards, my total credit limit would shrink to $2,000 and my credit utilization ratio would then spike to a less credit-worthy 50% (or $1,000 in debt/$2,000 in credit limit).
Simply put, keeping your credit card accounts open allows your total credit limit to remain in place and therefore helps your credit utilization ratio. And that's all good news for your credit rating.
The Investing Answer
Building excellent credit takes time but it's not impossible to do. By starting small, paying your lenders on time (and every time!), keeping your debts low, and keeping your credit card accounts open, even those with a modest income can look forward to bragging about their 740-plus FICO score to lenders not too far down the road.
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